Bangkok Post

US banks’ profit picture is hazy

- SAEED AZHAR NOOR ZAINAB HUSSAIN MANYA SAINI

NEW YORK: The uncertain trajectory of interest rates is making it hard for US banks to forecast profits and leading some to adopt a cautious stance for the remainder of the year.

Banks have reaped high profits in recent quarters as the Federal Reserve started raising interest rates in March 2022 to tame inflation, which boosted net interest income (NII), or the difference between what lenders earn on loans and pay out for deposits.

But that positive effect has been waning, and the outlook for rates is now uncertain, particular­ly after March inflation data came in higher-thanexpect­ed, pushing out Wall Street’s forecasts for when the Fed starts rate cuts.

“It’s certainly challengin­g these days to forecast NII, given all of the volatility that we’ve seen across a lot of the different data points, as well as some of the uncertaint­y that’s out there relative to how our clients are going to behave,” Wells Fargo’s finance chief Michael Santomassi­mo said.

Wells Fargo’s NII fell 8% in the first quarter, hurt by higher interest rates on funding costs, including the impact of customers moving to higher yielding deposit products, as well as lower loan balances. The bank repeated on Friday that its NII could fall 7% to 9% this year.

“People know interest rates are uncertain but rate changes have a faster effect on banks than other sectors,” said JJ Kinahan, CEO of brokerage IG North America.

JPMorgan Chase pointed to similar challenges in navigating the changing rates environmen­t. Chief Financial Officer Jeremy Barnum said on an analyst call following earnings that while its current guidance was not meaningful­ly different from what it was in the fourth quarter, it was based on the “current yield curve, which is a little bit stale now.” JPM reported that NII rose 11% but it forecast that full-year income from interest payments would be below analysts’ expectatio­ns. JPM’s executives have warned for months that its surging NII was not sustainabl­e.

“You’ve got to be prepared for a range of outcomes, which we are,” said Jamie Dimon on the analyst call. “All of these questions about interest rates and yield curves... We don’t want to guess the outcome. I’ve never seen anyone actually positively predict a big inflection point in the economy.”

Teddy Oakes, investment analyst at T. Rowe Price said there was little benefit to banks “sticking your neck out early in the year” and being too optimistic on NII, as higher expectatio­ns had already been priced in.

At Citigroup, net interest income increased 1% year-on-year. The bank forecast that NII excluding markets would be down modestly, as growth would be from non-interest-bearing revenue. Citi CFO Mark Mason said on a conference call that the fewer rate cuts expected this year don’t “have a material impact” on the bank’s guidance.

“Notwithsta­nding a supportive higher-for-longer rate environmen­t, early indication­s are that banks will mostly maintain their relatively downbeat 2024 net interest income guidance,” said Mark Narron, senior director at Fitch Ratings.

Dimon said the economy remained strong, with people having extra money to spend.

 ?? REUTERS ?? A customer walks out of a JPMorgan Chase & Co bank branch in New York.
REUTERS A customer walks out of a JPMorgan Chase & Co bank branch in New York.

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